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Natural Gas Retreats from 2-Month High - Analyst Blog

Natural gas spot prices rallied to $3.72 per million Btu
(MMBtu) on Thursday, Sep 19 - the highest in two months -
following the U.S. Energy Department's weekly inventory release
that showed a smaller-than-expected rise in the commodity's
supplies.

On a further bullish note, the storage build was also lower
than the benchmark 5-year average gain for the week. However,
natural gas ended slightly lower Friday (at $3.69 per MMBtu) on
profit taking and mild weather forecasts.

The report provides an overview of the level of reserves and
their movements, thereby helping investors understand the
demand/supply dynamics of natural gas. It is an indicator of
current gas prices and volatility that affect businesses of
natural gas-weighted companies and related support plays.

Analysis of the Data

Stockpiles held in underground storage in the lower 48 states
rose by 46 billion cubic feet (Bcf) for the week ended Sep 13,
2013, below the guided range (of 55-59 Bcf gain) as per the
analysts surveyed by Platts, the energy information arm of
McGraw-Hill Financial Inc.
(
MHFI
). Moreover, the increase - the twenty-third injection of 2013 -
was lower than both last year's build of 61 Bcf and the 5-year
(2008-2012) average addition of 74 Bcf for the reported week.

Despite past week's modest build, the current storage level - at
3.299 trillion cubic feet (Tcf) - is still 18 Bcf (0.5%) above
the 5-year average. However, supplies are down 187 Bcf (5.4%)
from the last year's level.

Natural gas stocks hit an all-time high of 3.929 Tcf in 2012, as
production from dense rock formations (shale) - through novel
techniques of horizontal drilling and hydraulic fracturing -
remained robust. In fact, the oversupply of natural gas pushed
down prices to a 10-year low of $1.82 per million Btu (MMBtu)
during late Apr 2012 (referring to spot prices at the Henry Hub,
the benchmark supply point in Louisiana).

However, things started to look up in 2013. This year, cold
winter weather across most parts of the country boosted natural
gas demand for space heating by residential/commercial consumers.
This, coupled with flat production volumes, meant that the
inventory overhang was gone, thereby driving commodity prices to
around $4.40 per MMBtu in Apr - the highest in 21 months.

Outlook

However, with moderate weather expected during the next few
weeks, leading to reduced power demand, natural gas price may
experience another downward curve. This, in turn, is expected to
pull down natural gas producers, particularly small ones.

However, one company that stands out is
Range Resources Corp.
(
RRC
). This Zacks Rank #1 (Strong Buy) independent natural gas
producer has been one of the better performing S&P stocks
since the start of 2013, gaining more than 25% during the period.
Despite this price appreciation, we remain optimistic on the
firm's near-term prospects, supported by its exposure to the
high-return Marcellus Shale play, as well as the company's
above-average production growth.

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